# I’m a 40-year-old teacher who doesn’t want to wait 15 years to retire. Can I live off the rental income from my three properties?

Thank you,

Desperate teacher

See: I want to retire next year but I have $25,000 in credit card debt and a major monthly mortgage payment — I also live with my three kids and ex
Dear Desperate Teacher, 

I’m sure those units feel like a great relief — as they are — but be cautious about how you include them in your retirement plans, especially if you plan on retiring early. You’re right, you seem to have invested wisely, but there are always ways to maximize the benefits of such investments. 

Having these rental properties is yet another way to bring in retirement income, and diversifying your retirement income is a seamless step in providing yourself a stress-free retirement. But as in all situations, it’s important to think through every aspect. A few examples: how this income is taxed, if your Social Security benefits will be affected, how you’ll get health insurance and what sort of housing environment you’re entering when you retire. 

If you manage your real estate as “passive” income, then you aren’t contributing to Social Security, which will affect you down the road when it’s time to claim benefits. Social Security’s formula incorporates numerous variables, a major component of which is how many years you’ve worked (or paid into the system through taxes, technically). A wrong move could have you unknowingly reducing your Social Security payments, or paying too much in taxes. “This is critically important to the longevity of her plan and should be a consideration,” said Scott McLeod, president and chief executive officer of Brown Financial Advisory. 

To understand these decisions and the potential consequences, you should find a CPA you can trust for advice, said Aaron Clarke, a wealth adviser at Halpern Financial. They’ll also be able to help you determine the tax implications of having too much or too little in mortgages for interest deduction purposes, Clarke said. And they may even advise you to structure your rental properties in a specific way, such as through a business entity. 

Another crucial point to have figured out well in advance of your retirement: health insurance. That’s the biggest “must-do,” said Jen Grant, a financial adviser at Perryman Financial Advisory. “If she is relatively healthy, she can purchase insurance individually,” she said. “If she is not, she may want to continue teaching for the health insurance.” 

Individual coverage is still more expensive than a group plan. If you have a working spouse with health insurance coverage, you could also look into joining that plan. You have a long way to go until you are eligible for Medicare — age 65 — but keep in mind, the cost of health care only rises as a person ages. A single woman retiring at 65 in 2020 can expect to need $155,000 to fund health care expenses alone during her retirement, according to a Fidelity Investments study. An unexpected health expense or doctor bill could be a nightmare, so try to avoid that however possible. 

Also, find the right time to make your decision. “The rental real-estate market during COVID-19 has been a great example of why you don’t have all of your eggs in one basket,” McLeod said. “She will need to have some backup plan in case something happens.” In some parts of the country, rental income is going down, said Thomas Rindahl, a financial adviser at TruWest Wealth Management Services. There are also moratoriums on evictions for renters, which means if they can’t afford to pay rent because they were impacted by the pandemic, they can delay doing so. This is a great benefit for people in need, but has caused some tension for landlords who still have bills to pay on their properties. 

With all rentals come other factors to think about, such as major repair expenses you’d have to pay for and any vacancy periods when one or more rentals are not occupied. 

Also see: 2020 looks like an unprofitable year for rental properties. How to handle the taxes 

That leads us to income diversification. You said you have your retirement account with $40,000, which is great, but you will likely need more in your retirement years (and don’t want to touch that money now). Depending on the type of account, there may also be restrictions as to how and when you can distribute any money from those funds. Rental properties are incredibly valuable, but they don’t provide fast money. 

“You can’t just sell part of a rental property and generate more cash,” said Robert Pyle, a financial adviser at Diversified Asset Management. Retiring early has its perks — who doesn’t want more freedom faster? — but you may want to weigh your options, such as how much more you can save and invest with this job (or something else, if it makes you happier) and what other income sources you’ll tap in retirement. 

Before you jump into retirement, you may want to work with a financial planner to review all of your assets and liabilities, and determine the best plan for your retirement goals. They’ll also assist you in how best to use your current retirement savings and maximize the growth and use of that money. For example, rental income is considered ordinary income for tax purposes, but earnings from a mutual fund portfolio is taxed at capital-gains rates, which are lower than ordinary income rates. Financial planners can help you determine how to make the most of the investments you have. 

Finally, have an emergency plan in place. Life is full of surprises, and now more than ever people are realizing the power of an emergency fund. This is especially true for someone who wants to retire early and rely on rental income, Grant said. Financial advisers typically suggest having three to six months’ worth of expenses in an emergency fund, but Grant said you should aim for a year. 

“Most of their assets are tied up in the rental houses, which are not liquid, so they will need other ways to handle emergencies,” she said. 

Have a question about your own retirement savings? Email us at [email protected].